There Are Reasons To Feel Uneasy About Norofert's (BVB:NRF) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Norofert (BVB:NRF) and its ROCE trend, we weren't exactly thrilled.

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What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Norofert, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.13 = RON7.1m ÷ (RON88m - RON32m) (Based on the trailing twelve months to December 2024).

So, Norofert has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 8.7% generated by the Chemicals industry.

See our latest analysis for Norofert

Historical performance is a great place to start when researching a stock so above you can see the gauge for Norofert's ROCE against it's prior returns. If you'd like to look at how Norofert has performed in the past in other metrics, you can view this free graph of Norofert's past earnings, revenue and cash flow.

What Does the ROCE Trend For Norofert Tell Us?

In terms of Norofert's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 13% from 29% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Norofert's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Norofert. These growth trends haven't led to growth returns though, since the stock has fallen 30% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you want to know some of the risks facing Norofert we've found 3 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.